Friday, December 7, 2012

Budget Sequestration & Defense Spending

The Federal Budget Sequestration & Defense
Spending Repercussions

It’s Not
the Fall that Will Kill You…It’s the Sudden Stop.

by
James M. Terhune, President / CEO

While the highly-toted budgetary experts employed
by the national news media and their Internet and Twitter based brethren continue
to crank the warning siren of impending doom, the American public tries to sort
out the truth from the hyperbole about our fiduciary woes.From the perspective of this observer,
there is one very significant budgetary segment that is being largely
overlooked in this shrill and frantic reporting on the impending “fiscal
cliff”. As the media maps out the road to the cliff, there are two drivers each
behind the wheel; President Obama who will not compromise on raising the tax
rates for those earning $250,000 and above and Speaker Boehner who insists on
significant reductions in entitlement programs. But what about the drastic
reductions in Defense spending that will result from sequestration? In the
current reporting, if this topic is mentioned at all, it is but a footnote to
the “headline” issues of tax rates and entitlement reform.

If your only conduit to the news is the main-stream
media than you may not be aware that the Senate did pass a defense spending
bill this past week. The Senate bill supports the budget request for many major
investment programs including: CH-47 and UH-60, and AH-64 Block III
helicopters; Army’s Ground Combat Vehicle and STRYKER programs; and F-35 (JSF),
F/A-18E/F, EA-18G, and C-130J aircraft. The bill approves multiyear
procurement authority for V-22, Virginia-class submarine, and Arleigh
Burke-class destroyers. But what about sequestration?

At the December 5th press briefing, Mr.
George Little, spokesperson for the Department of Defense responded to a
question about the approaching “cliff”. He revealed that, “We are consulting
with the Office of Management and Budget and have been instructed to pursue
internal planning on sequestration.” So, does this directive from OMB signal the Defense
Department’s budgetary Armageddon? Probably not. William Hartung from the
Center for International Policy noted that while sequestration is bad
management, the Pentagon – and the private industry supporting it – isn’t
necessarily facing the drop-off in spending that some are painting it out to
be. “Many of the Defense Department’s prime contractors have large backlogs;
the Pentagon has $100 billion in unobligated dollars,” Hartung said. “There’s
no fiscal cliff for the Pentagon. It’s more of a gradual slope.”

And what about the budgetary “cost savings” that
typically occur at the end of military combat? Recent history verifies that the
United States has cut its military expenditures by about 30% at the end of major
conflicts. President Dwight Eisenhower cut defense spending by 27% after the
end of the Korean War; President Richard Nixon reduced the budget by 29% as we
withdrew from Vietnam, and Presidents Ronald Reagan, George H.W. Bush, and Bill
Clinton combined to cut military spending by more than 35% as the Cold War came
to a close. So is it reasonable to expect a 30% reduction in military spending
as we bring our troops home from Iraq and Afghanistan?Probably.

But what about the impact of the anticipated Defense
Department budget cuts to weapons systems, aircraft, ships and troop levels on
American business? From my vantage point as an owner of a small business that
provides raw materials to the military and their prime contractors, here are my
predictions. Reductions of uniformed troop levels will not be dramatic. Perhaps
some reduction and/or consolidation in the number of high-ranking command
officers. Some delays and/or cancellations of weapons programs will occur, but
the strategy will focus on delays from development to production, or on reduction of quantities to be produced, verses
outright cancellation. What I do believe will occur is a significant reduction
in the military’s civilian support staffing, which will precipitate an increase
in the demand on their supply chain vendors to provide more technical,
administrative and logistical support for defense procurement.

Recognizing that it is inevitable that budgetary
reductions will be made at the Pentagon, I believe the successful strategy for
suppliers to the military is to insure that you are capable and prepared to
shoulder more of the procurement support functions that are required. Those
companies that demonstrate that they can successfully fill the void left by the
civilian staffing reductions will be ones left standing after the sequestration
storm makes landfall.